Yesterday, the Bank for International Settlements (BIS) published the BIS Quarterly Review to provide an overview of recent developments in financial markets. In particular, the Quarterly Review provides a discussion on the reduction in the demand for risky assets as a result of a number of factors, including:

  • Weakening investor confidence as a result of "mixed news on the economic recovery in Europe and the United States";
  • "Unevenness of the global economic recovery";
  • Concerns about sovereign credit risk, in particular the "fiscal woes" of Greece which placed downward pressure on the prices of risky assets; and
  • Financial risks of prolonged fiscal deficits.

The Quarterly Review also provides several statistical highlights from the latest BIS data on international banking and financial activity, noting that banks' international balance sheets contracted again in the third quarter of 2009, although the pace of the decline was much slower than in the preceding three quarters. Activity in the primary market for international debt securities weakened "markedly' in the fourth quarter of 2009, with announced gross issuances declining by 10% quarter over quarter. Finally, the recovery in activity on international derivatives exchanges "continued at a modest pace" in the fourth quarter of 2009, with turnover up by 5% to $444 trillion, 22% higher than at the trough in the first quarter but still well below its peak ($690 trillion) in early 2008.

Included in the Quarterly Review were the following four articles:

  1. The Architecture of Global Banking: From International to Multinational - Distinguishing between "international" and "multinational" banks and the implied geographical funding patterns. The authors note that "local positions proved to be more stable than cross-border positions, especially in emerging markets, where they tended to be in the local currency and funded by retail deposits."
  2. Exchange Rates During Financial Crisis - Describing the "unusual" exchange rate movements during the global financial crisis of 2007-09, and that "safe haven" flows of capital and interest rate differentials caused a large number of countries that were not at the center of the crisis to depreciate against three major currencies: the U.S. dollar, Japanese yen and Swiss franc.
  3. The Dependence of the Financial System on Central Bank and Government Support - Briefly discussing the many public support measures put into place in response to the financial crisis and the reasons for phasing out such public support schemes including their ability to "distort competition" and "induce banks to postpone necessary balance sheet adjustments and encourage additional risk taking."
  4. The Term "Macroprudential": Origins and Evolution - Tracing the rise of the term and concept of "macroprudential" orientation of regulatory and supervisory frameworks, and its particular noteworthy in the wake of the recent financial crisis. The author clarifies that at the BIS, the term "refers to the use of prudential tools with the explicit objective of promoting the stability of the financial system as a whole, not necessarily of the individual institutions within it."